Anglo and ILP were at odds over treatment of €7.2bn deal

A senior accountant for Anglo Irish Bank has told the trial of four former senior bankers that it wasn't a good moment for him when the bank's auditors contacted him in 2009 about the accounting treatment of a billion euro deal.

Four men are accused of conspiring to mislead investors by setting up a €7.2 billion circular transaction scheme to bolster Anglo’s 2008 balance sheet.

Peter Fitzpatrick (63) of Convent Lane, Portmarnock, Dublin; John Bowe (52) from Glasnevin, Dublin; Willie McAteer (65) of Greenrath, Tipperary town, Co Tipperary; and Denis Casey (56), from Raheny, Dublin have all pleaded not guilty at Dublin Circuit Criminal Court to conspiring together and with others to mislead investors through financial transactions between March 1st and September 30th, 2008.

On day 46 of the trial, Ciaran Cunningham, who was senior manager with Anglo's treasury finance department, continued giving evidence about his team's role in putting together the bank's balance sheet and final year accounts.

The jury has heard that Anglo’s treatment of the €7.2 billion deal was disputed later by Irish Life & Permanent (ILP). The dispute centres around the financial practices of settling net or netting, which would link the loans from Anglo to the deposits placed by ILP with Anglo.

The evidence is that ILP insisted before the transactions took place that they would be netted. They did this in order to protect ILP in the event of Anglo closing down and their liquidators going after Anglo’s debtors, the trial heard.

In a telephone call on October 1st, 2008, Anglo traders in the bank’s treasury section discussed how they could treat the deals from the previous month.

The jury heard that Mr Cunningham was brought into the conference call to advise the traders. He told them: “I think it’d be our preference to show them grossed, to be honest.”

Settling the transactions gross would mean the €7.2 billion in short-term deposits from ILP could be included in the bank’s balance sheet figure for customer deposits, which is what ultimately happened.

Mr Cunningham told the traders: “The risk is if we do settle them net, we could be forced to net them in the accounts. That’d be a bit of a disaster”

He told Úna Ní­ Raifeartaigh SC, prosecuting, that by “disaster”, he was referring to the fact that the intention of the transactions was balance sheet management and that netting them would have failed to achieve this.

Michael O’Higgins SC, for ILP’s former chief executive Denis Casey, put it to the witness that after ILP released a press release in February outlining their version of the transactions Anglo’s auditors contacted Ciaran McArdle, the main trader behind the deals.

Counsel said Mr McArdle told the auditors the transactions were settled net. The auditors then contacted him, “presumably hopping”, Mr O’Higgins said.

Mr Cunningham then “got on to” Mr McArdle who confirmed the deals were settled net. Counsel put it to the witness: “That must have been a pretty awful moment. The ground would have opened up. That’s a moment you’re never going to forget”.

Mr Cunningham agreed, saying: “It’s wasn’t a good moment”.

The trial continues before Judge Martin Nolan and a jury.

Earlier, the witness agreed with Brendan Grehan SC, defending ILP’s former group finance director, Peter Fitzpatrick, that he was very aware that all calls in the bank were recorded to create a permanent record of all deals made between traders.

“You do realise when a trader picks up the phone and speaks to another trader and they agree huge deals, there is in fact no written contract,” counsel said. Mr Cunningham agreed the transaction could be verbally agreed.

Mr Grehan said that, in 2009, when the treatment of the €7.2 billion deals came into question, he discussed with colleagues the possibility that Mr McArdle may have made an oral contract over a mobile phone and so there was no record of it.

“You’re keenly aware of the idea of oral contracts, and if someone agrees something, you’re stuck with the consequence. If somebody had a conversation that wasn’t on the tapes, we’re stuck with the consequences on it. That’s the way business is conducted,” Mr Grehan said.

Counsel put it to the witness that, as the accounting department, he and his colleagues had no business in attending meetings to plan how to generate funds or deposits and how they would be treated on the balance sheet.

“From very early on, finance are involved in what really shouldn’t be any of their business, which is simply to look at what happened, at the end, and account for it,” Mr Grehan said.

He said that the department was advising carefully on how to structure transactions so they would be accounted for in a certain way.

Mr Cunningham said that this was a process that started in early 2008 to forecast what the balance sheet would look like. He agreed that accounting getting involved in attending funding meetings was a new thing that started that year.

He agreed that these meetings went beyond forecasting and that target figures were being set.

Mr O’Higgins put it to Mr Cunningham that in determining how to treat the transactions “the checks and balances were never done”.

“We are probing as to why. Was it because the finance department was simply working on the basis that the transaction was always going to be accounted for as gross. Some very basic checks were not done,” counsel said.